Tuesday, January 20, 2009

Six Ways to Identify a Trend Day in the Stock Market

Recognizing a trend day while it is in progress can lead to a number of home run trades, not least of which is simply selling the market and staying short through the day. Here are a few ways of recognizing a downside trend day in the making, drawing upon today's excellent example:

1) Cumulative NYSE TICK and Cumulative Market Delta start negative and go into a downtrend early in the session;

2) Advance-Decline statistics are skewed from the open, with declining stocks swamping advancers by 2000 or more issues within the first hour of trading;

3) The market opens below its pivot level (average price from the previous trading session), never trades above it, and hits S1 early into the trading session;

4) The market's leading weak sectors going into the day's trade (financial/banking stocks, in this case) continue their weakness and lead the market downward;

It is easy to get stopped out of a good trade in a downtrending market; the enhanced volatility ensures that countertrend moves will be uncomfortable. A close inspection of today's chart will show many multi-point countertrend moves during the market's steep fall. Traders who wish to ride the trend need to place stops wide enough to weather these movements. One of my favorite techniques is to look at a prior bounce in the market that occurred at a higher level than the current bounce that I'm selling and place my stop around that level. Sizing your trade so that you won't lose your shirt if you're stopped out (or so that you won't exit the trade prematurely because you can't take the heat) is key to maximizing the home run trade.

Moving forward, I will be posting trend related information during trading days via the Twitter service (free subscription via RSS).

9 comments:

Very good points Brett! I've made some very detailed posts on using the NYSE TICK and VIX on my Blog; accompanied with a lot of screen shots taken in real-time. Would love to hear your thoughts on my approach if you have some time to discuss. Btw, I'm in Chicago; not too far from you.

Here's a post I made on last Friday's gap and go session discussing how we may be able to identify gap fill days and gap and go days: http://eminiplayer.blogspot.com/2009/02/friday-020609-gap-and-go.html

One of my major hurdles is being able to morph a current position from an opening session Scalp and into a directional ride. Granted this requires an obvious re-sizing (i.e. downsizing) of the position but being able to recognize a trending day from an opening thrust is something I need to improve upon.

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), and The Daily Trading Coach (Wiley, 2009) with an interest in using historical patterns in markets to find a trading edge. I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab).